Allied Bank vs CA,1998

Nature: Petition for Review

Facts: Petitioner Allied Banking Corporation (ALLIED) leased a property owned by Spouses Filemon and Lucia Tanqueco. The
lease contract states that, “the term of the lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed
for a like term at the option of the lessee.”

In 1988, the Tanqueco spouses executed a deed of donation over the subject property in favor of their four (4) children.

In 1991, a year before the expiration of the contract of lease, the heirs of Tanquecos notified petitioner ALLIED that they were no
longer interested in renewing the lease.

ALLIED, on the other hand, replied that it was exercising its option to renew their lease under the same terms as was agreed with
the original lease of contract with additional proposals, however, petitioner rejected the proposal. When the lease contract expired
in 1992, the heirs demanded that ALLIED vacate the premises. An action for ejectment was commenced before the MeTC of
Quezon City.

Issue: Whether the stipulation in a contract of lease stating “may be renewed for a like term at the option of the lessee” is violative
of the principle of mutuality of contract?

Held: No.

Rationale: The lease contract was mutually agreed upon hence valid and binding on both parties, and the exercise by petitioner
of its option to renew the contract was part of their agreement and in pursuance thereof. Article 1308 of the Civil Code expresses
what is known in law as the principle of mutuality of contracts. It provides that "the contract must bind both the contracting parties;
its validity or compliance cannot be left to the will of one of them." This binding effect of a contract on both parties is based on the
principle that the obligations arising from the contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract
while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.

An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions,
valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the
consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the
lessor to act conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to obtain
a renewal if there is compliance with the conditions on which the rights is made to depend. The right of renewal constitutes a part
of the lessee's interest in the land and forms a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of
mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether
to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound
by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of
the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter
escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality
exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment.

Decision: WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that petitioner ALLIED
BANKING CORPORATION already vacated the leased premises as of 20 February 1993, the renewed lease contract is deemed
terminated as of that date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in their existing
contract, subject to computation in view of the consignment in court of P68,400.00 by petitioner, and of such other amounts it may
have deposited or advanced in connection with the lease.